Bill C-501 (Historical)

An Act to amend the Bankruptcy and Insolvency Act (termination and severance pay)

This enactment amends the Bankruptcy and Insolvency Act to ensure that the claim of a clerk, servant, travelling salesperson, labourer or worker who is owed termination and severance pay by a person is secured as of the date of the bankruptcy or receivership by security on the person's current assets.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you, Mr. Chair.

As a legislator, if I have a pensioner in my office and he or she tells me they have contributed to a pension plan during their working career and that they regard this as deferred wages, if their company goes bankrupt after they are on pension, it is probably true to say they have very little alternative but to absorb a loss of pension income. I understand that part. I also understand where many of you are coming from with respect to the importance of having access to credit for companies to prosper and grow, and having certainty in the market.

The fact is that this Bill C-501 is very limited in its scope, although it may not have appeared that way to many people. It does not talk about retroactivity, it simply deals with arrears in special payments up to the moment of bankruptcy. That period of time can vary from one bankruptcy to the next.

What I have been surprised by is the range of analyses and estimates as to the impact of that. I have heard that this is not really that big a deal and it is not going to cause bond market instability, while other people have said the hit is really big.

I am trying to get a sense of that. I haven't got that sense of it. As legislators, where we are talking about prioritizing and the impacts on different groups, whether it's the bond markets or pensioners, it would be good for us to have a real impact, since we need to make decisions like Solomon.

It seems to me, Mr. McKenna, you were talking about this issue. The special payments in arrears didn't seem to be an impossible thing to deal with. I'd like to hear a little more from you and others on that, as to where you situate the problem.

[John Farrell]

I can.

Among other things, in addition to my responsibilities for managing FETCO, I have been, and continue to be, involved in the pulp and paper industry. I'm responsible for working with the companies to coordinate the collective bargaining activities from the Manitoba border through to Newfoundland.

AbitibiBowater has been a member of this group that I manage for over 25 years. As a consequence, I know the officers and people at the company. Just yesterday I was speaking with Bruce Robertson, who's the chief restructuring officer of AbitibiBowater. Fortunately, after almost two years of restructuring at AbitibiBowater, the company is restructuring and is emerging from bankruptcy protection under the Companies' Creditors Arrangement Act, which is extremely good news for all the people who live in the communities where AbitibiBowater operates.

How did they get there? An arrangement has been made with the pension regulator in Quebec and Ontario to preserve the value in the pension plans for current retirees, so that the plan was not wound up, and it prevented the crystallization of the losses in the plan.

As well, the company and the union have agreed that in the future they will scrap the defined benefit plan and they will move forward with a form of target benefit plan, which is similar to a defined contribution plan, with far less risk. They have found a way to work with the regulator over a two-year period to sort out their restructuring. They fortunately didn't have to go bankrupt and they found a solution.

So I asked Bruce Robertson, “What if this Bill C-501 had been in existence two years ago?” His answer was that it would have increased the risk dramatically, that we would not have been able to achieve restructuring, and liquidation would have been almost certainly what would have happened. If liquidated, the company would have been forced to eliminate the employment of 8,500 direct jobs.

In a mill community, where the entire community is dependent on the operation of the mill, it's well known that every single job that's lost in a mill will cause the further reduction of four jobs in the community. So this would have resulted in the eventual demise of an additional 34,000 jobs, for a total of 42,500 jobs that would have been lost if AbitibiBowater was unable to find a solution to its pension problem and its restructuring issues.

[Michael Boychuk]

In percentages, once again, we're talking about basis points. I don't want to go too far into the technical details, but I can say one thing: most credit agencies do their calculations based on current events. We included some charts in our submission. I'm going to use a good example of what happened in the case of a company called Manulife so that everyone around the table will understand.

On August 5, Manulife reported its second quarter results. This is a company similar to a pension fund; it does asset liability management. Its earnings release resulted in downgrades by the credit rating agencies. In a very brief period of time, the cost of its credit on the 2018 bond rose by 55 basis points. That means more than half a point. That's just one case among many. I could give you examples of a number of other situations in which an event occurred. Perhaps Mr. Dafoe can talk more specifically about the events, about what would happen if Bill C-501 were poorly perceived by the capital markets.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Thank you, Mr. Chairman.

Good morning and thank you for coming to testify this morning. In listening to you, we can see there is some similarity in your remarks. I believe we can say you are not much in favour of Bill C-501. I thought I heard the same reasoning from a number of you with regard to the cost of capital. I understand that the cost of capital, interest costs, would be higher if Bill C-501 were implemented. Perhaps I'll put my question to Mr. Farrell or to Mr. Boychuk.

Did you estimate how much it would cost if Bill C-501 became law, if it were adopted? What would be the cost of capital for businesses that would have to borrow?

[John Farrell]

Ms. Sgro, if I could be of some assistance here, obviously these pension matters are very complicated. It's very difficult for the average Canadian, the average person, and the average politician to understand how pension plans work and how capital markets work. A great deal of work has to be done by the members of Parliament to understand the complexity of this issue.

It's unfortunate. I think that Mr. Rafferty has the best of intentions for his constituents, some of whom may be employees of AbitibiBowater, a company that's been in serious difficulty and is beginning to come out of it. But this is a knee-jerk reaction. This is a bill that is going to create far more collateral damage than any net good. So it really is incumbent, I think, on the politicians of this government and the politicians in all of the provinces to join together to effectively review the pension legislation that exists across this country, because it's not, strictly speaking, a federal matter. Find some reasonable approaches, understand the problem, and fix it. But if we engage in a knee-jerk reaction, such as Bill C-501, we'll end up with a situation in which we're worse off in the long run.

[Michael Boychuk]

And therein lies the inequity of what comes out of Bill C-501.

[Judy Sgro, Liberal, York West, ON]

Thank you very much, Mr. Chair.

And thank you very much to all of you this morning. Certainly the intensity of your comments solidifies your concerns about Bill C-501.

From this end of the table, of course, we're very concerned about the implications, but we're very concerned about trying to help people, such as the Nortel employees we have heard about this year, who have lost so much of their pension income. Just how do we go about protecting them?

Bill C-501 is very narrow as far as that special payment category goes. Mr. Rafferty has indicated that he would be moving to the preferred unsecured category rather than to super-priority status. It's only that special payment. We're trying to find some way to help some of the people who are clearly suffering as a result of the bankruptcies. I'm sure that you are all sympathetic. I've heard that in your voices. The question is how we change it. How do we fix it?

Can you suggest any way we can help the Nortels of the world? Will this bill help Nortel?

[John McKenna]

Essentially, Bill C-501 deals with three areas, all related to employee protection. Due to time constraints, we will not deal today with the third area, which relates to a change to the Canada Business Corporations Act to facilitate the processing of claims against directors.

Regarding the first area, the bill proposes that super-priority protection will be extended to any arrears of special payments. To the extent that this is the change that is contemplated, we would support such a change, as we see no substantial public policy reason that would justify a different treatment between the normal cost arrears and special payment arrears, and it could be accommodated with reasonable efficiency in insolvency proceedings.

However, to the extent that the intent is to create protection for the entirety of the pension deficit, CAIRP has identified a number of significant issues that would materially negatively impact companies sponsoring defined benefit pension plans. These issues are set out in detail in CAIRP's paper, but the net effect of these can be summarized as, firstly, to reduce by a potentially significant amount the credit available to all companies that have or are viewed as having defined benefit pension plan deficits. It may also make it impossible for an insolvent company to borrow to finance its operations during a restructuring.

Secondly, it could cause downgrades in the credit rating and/or in increased interest rates for such companies. Thirdly, it could accelerate the probability of insolvencies for such companies due to reduced availability of both secured and unsecured credit. Fourthly, it could make insolvency proceedings lengthier and more costly.

Finally, it could decrease the possibility of achieving a successful restructuring. In our view, this would be counterproductive to the interests of many stakeholders, such as current employees, suppliers, customers, and investors, as experience tells us that restructurings return more value to creditors and preserve jobs.

[Jean-Daniel Breton, Senior Vice-President, Ernst & Young Inc., Canadian Association of Insolvency and Restructuring Professionals]

Given its mission, CAIRP has cooperated closely in the insolvency reform since 1992 and, more particularly, as consultants on preparation of the act adopted in 2007. It was with that in mind that we prepared our brief on the various bills tabled in the House of Commons and Senate which contains our comments on Bill C-501, which is being examined today.

CAIRP acknowledges the importance of providing adequate protection for employees and former employees who constitute groups of vulnerable creditors—

[John McKenna, Chair, Corporate Practice Committee, PricewaterhouseCoopers Inc., Canadian Association of Insolvency and Restructuring Professionals]

Good morning, Mr. Chairman and distinguished members of the committee.

My name is John McKenna, and with me today is Jean-Daniel Breton, appearing on behalf of the Canadian Association of Insolvency and Restructuring Professionals, known by the acronym CAIRP in English, or ACPIR in French.

CAIRP is the national not-for-profit organization that represents some 900 insolvency and restructuring professionals in Canada. As licensed trustees in bankruptcies, receivers, monitors, and financial advisors, CAIRP members are, and they have been, involved in every major insolvency and restructuring filing in Canada, both on a corporate and a personal basis.

As such, CAIRP's comments on Bill C-501 come from experienced insolvency professionals who are called upon daily to apply insolvency law.

[Stephen Dafoe, Director, Corporate Bond Research, Scotia Capital]

Mr. Chair and committee members, I want to thank you for the opportunity to appear.

I'll begin by clearing up some misconceptions that may be left from previous comments.

First, a billion dollars is a lot of money. If you want to make the denominator large enough, say the entire Canadian economy, almost any cost or loss can be made to appear small or manageable. But in the context of the Canadian corporate bond market, which is what I think we should be considering here, a few billion dollars would be very, very damaging. Even a billion dollars would be a very significant loss, and it wouldn't be easily recovered.

Corporate bonds are relatively safe investments, especially in Canada, where the vast majority are of investment grade. Investment-grade bonds have low volatility, which is what makes them safe compared to equities or trust units. If that low volatility means a 1.5% loss, or whatever the loss might be, it would be difficult, if not impossible, to be quickly and easily recovered.

On another matter, regarding credit default swaps, there's very little net CDS protection outstanding on the bonds of Canadian corporations. A characterization that there's more net CDS insurance protection than there are bonds outstanding is not the case generally, and it is certainly not the case for the Canadian corporate bond market.

These bonds aren't held by faceless speculators, or just by wealthy sophisticated individuals; they're mainly held by ordinary Canadians, both workers and retirees, through their savings in mutual funds, life insurance policies, and pension funds. They're managed by professional investment managers. These managers have a fiduciary responsibility to avoid undue risk and to be adequately compensated for the risks they do assume by holding these bonds.

As you know, the credit rating agencies made terrible mistakes with ABCP and other structured securities, and they have seen their reputations suffer for that. But the rating agencies by and large understand and evaluate corporate credit pretty well, so professional investment managers still pay attention to what the rating agencies have to say.

In discussing this bill the image has often been made of a queue, and the question is posed about who is at the head of the queue. This is exactly the way the rating agencies view the bankruptcy scenario. If through this legislation corporate bonds were suddenly placed behind pension liabilities, downgrades could ensue in many cases.

This would be virtually certain to happen, in my experience. I've worked at two rating agencies for twelve years, and I've been critiquing and predicting the actions of the rating agencies for the nearly ten years I've worked at Scotia Capital. If the rating agencies downgrade, and especially if the market agrees with the rating agencies' reasoning, the losses on outstanding bonds would be very significant and very hard, or impossible, to recover.

As well, because such bond market losses would be based on prudent estimates of possible future scenarios by managers seeking to avoid risk, there's no reason to think there's an even offset between the amounts lost because of downgrades and spread widening and the amounts gained by the relative few who stand to benefit from the bill. The losses could easily outweigh the benefits.

I've published research on the bond market effect of Bill C-501, and it's being submitted to the clerk of the committee. While it may seem technical, I respectfully wish that it will be of some use to the committee in understanding how the Canadian bond market could react to the proposed legislation.

I can tell the committee that the bond market professionals I've spoken to about my research in the past few weeks all agree that the bill is very concerning. While they understand it's been proposed with the best of intentions, it could have very serious unintended consequences.

Mr. Chair and members, thanks for the chance to appear today, and thank you for your attention. I'd be pleased to answer any questions.

[William Randle, Assistant General Counsel and Foreign Bank Secretary, Canadian Bankers Association]

Thank you, Mr. Sweet.

Good morning. My name is Bill Randle. I am the assistant general counsel at the Canadian Bankers Association. With me today is Bill Kennedy. He's vice-president, special loans, with the National Bank of Canada. We appreciate the opportunity to appear before the committee today to discuss Bill C-501.

We sympathize with Canadians who face a reduction in their current or future pension benefits upon the bankruptcy of their former employer, and we applaud MPs and senators who are championing efforts to find solutions. We believe that every effort should be made to attempt to prevent Canadians from experiencing such hardship, but we are here today to raise our concerns about the particular solution that is proposed in Bill C-501 and about its potential impact on the ability of employers who sponsor defined benefit plans to invest in research, new equipment, and expansion; on the ability of employers to successfully restructure and maintain jobs and operations when they themselves are in difficulty; and on the savings, including the retirement savings, of millions of Canadians who hold corporate bonds through their RRSPs, employer-sponsored pension plans, the Canada Pension Plan, and the Quebec Pension Plan.

There is a delicate balance that has been achieved over the years in the order of priorities in bankruptcy legislation. This balance aims to ensure that the rights of various creditors can be met while also ensuring that companies are able to access reasonably priced credit to fund their operations and make the investments they need in order to grow and be successful in an increasingly international marketplace. Changes to the order or priority in bankruptcy threaten to seriously undermine this delicate balance, with ripple effects across the economy.

Our major concern with this bill is that giving priority to potentially very large pension deficits will decrease the funds available to repay other creditors. As a result, both lenders and investors would experience a significant increase in their risk.

Financial institutions, as you know, manage risk very carefully, and the amount of risk they are allowed to take is closely regulated by the federal government. As the recent financial crisis highlighted, there are very good reasons for paying such close attention to the risk in financial institutions.

One of the main methods financial institutions use to manage risk is to carefully assess the amount that will be available to repay a loan if a company enters bankruptcy proceedings. As a result, if funding deficiencies in a company pension plan are given priority, as proposed in this bill, and therefore the amount a lender can expect to recover is reduced by the amount of the pension plan deficit, there will be a corresponding reduction in the amount a company will be able to borrow. Indeed, prudent lending practices, which require an abundance of caution, will probably result in further pressure on the availability of credit in order to reduce the risk of losses.

Large and well-established companies often turn to the financial markets to borrow funds. For investors who purchase financial instruments such as bonds, a change in the order of priority once again increases the risk that they will recover a smaller proportion of their investment if the company experiences financial difficulties. This increased risk means that investors will be more reluctant to buy a company's bonds, thus depriving it of financing, or would do so only if there was a higher risk premium on the bonds, making financing more expensive. In effect, higher risk means increased financing costs, which in turn will prevent some businesses from effectively financing their operations or expansions. Ultimately this leads to reduced economic growth and job creation.

Beyond the direct impact on the financial markets and the cost to businesses of raising funds, the super-priority contemplated in this bill will have a number of other negative consequences, including the following: first, companies with a defined benefit pension plan would find themselves at a competitive disadvantage either to companies without such a plan or to international competitors in other jurisdictions. This may provide a further incentive to employers to switch to defined contribution plans or to close their defined benefit plans to new entrants, to the detriment of younger Canadians. As well, other unsecured creditors, such as suppliers--many of them small businesses--will have a significantly reduced likelihood of recovering the amounts they are due, which may put pressure on their own finances. Since lenders and investors will be less likely to agree to advance funds to help save a company due to the additional risk, it may be more difficult for companies to restructure and ultimately avoid bankruptcy. Finally, by increasing the risk for many corporate bonds, a super-priority would have a detrimental effect on the investments and retirement savings of millions of Canadians.

As I noted earlier, the challenge for lawmakers and stakeholders is to find the appropriate balance in addressing the problem of unfunded pension liabilities without damaging the ability of companies to raise capital to invest in research and development or expand their operations, which may limit their growth and their potential success. In our view, amendments to bankruptcy and insolvency statutes are not an appropriate solution and will tip this balance in a way that could impair economic growth and ultimately be detrimental to workers when companies find it more difficult to restructure or invest in projects that could lead to job creation and higher wages.

We would be pleased to answer your questions.

[Craig Hill, Co-Chair, Task Force on Pension Reform, Insolvency Institute of Canada]

I wish to thank the chairman and the members of the committee for the invitation to speak to these important hearings on Bill C-501.

It is clear that Bill C-501 creates a priority charge on all of a debtor's property for unpaid termination and severance pay and the full amount of any pension deficiency. The charge in Bill C-501 includes, and I quote, “any amount considered to meet the standards for solvency determined in accordance with section 9 of those regulations”--that is, the pension benefit standards--“that were required to be paid by the employer to the fund”.

The charge is not limited to special payments that are past due on the day of the insolvency proceeding. The honourable member for Thunder Bay--Rainy River said upon the introduction of the bill that if passed, Bill C-501 will mean that every working Canadian can take comfort in knowing that their pension, their retirement, is secure in its entirety.

The impact of Bill C-501 is not limited to an increased cost of borrowing in the bond markets. Smaller and mid-size companies borrow funds from banks for their operating lines to pay their daily expenses. Access to lines of credit is based on their available collateral. Most operating lines of credit are on a demand basis or have strict review provisions that will be triggered by the imposition of the priority charges created by Bill C-501. If Bill C-501 is passed, lenders will change the margin requirements and impose additional discretionary reserves on the borrowing base. This will remove from the calculation of available collateral dollar-for-dollar amounts of any priority charges.

This is precisely what occurred when the priority charges were granted for unpaid wages. However, in the case of termination pay, severance pay, and pension deficiency amounts, the carve-outs will be substantially higher. The impact will be to severely limit access to credit for all employers, particularly pension plan sponsors. Bill C-501 will materially affect solvent companies. It will be the death knell for many struggling or financially troubled companies.

The cornerstone of Canadian insolvency laws is the flexibility provided to financially troubled companies to attempt to restructure, and continuing is a going concern. That is the best way to attempt to protect employer-related obligations. Priority charges and mandatory criteria for restructuring add roadblocks to those objectives. They cause financial difficulty for employers who are already struggling and significant impediments to their ability to restructure. The result will be an increase in the number of insolvencies that have no alternative but to head straight to liquidation.

Substantial reforms are required in Canada's pension law to address the weaknesses that the economic events of the last decade have revealed. However, taking that agenda to insolvency legislation by expanding priority charges and setting bottom-line conditions for restructuring are commercially imprudent, ineffective, and inappropriate. The additional financial burdens created by Bill C-501 will worsen the situation for the vast majority of solvent companies, while providing only limited impact for employees of the minuscule percentage of companies that become insolvent. Bill C-501 will cause more insolvencies by generating the conditions for a tighter credit market and reducing the number of businesses that will be able to successfully restructure if they become insolvent. As importantly, the financial burdens placed on Canadian employers will impede their ability to compete in a global marketplace, all of which will occur in a sensitive stage of economic recovery for Canadian companies.

Mr. Davis and I will be pleased to answer any questions the members of the committee may have.

Those are my comments.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

I'm sorry. I have to address that.

Just to be clear, Mr. Chair, what we're studying right now in the industry committee is a private member's bill dealing with Nortel pensioners. We have two more meetings still—today and Thursday—to deal with it. Yes, it's important to the government. It's an NDP private member's bill. And yes, it is important to the government that we finish studying that bill. I'm not sure whether Mr. McTeague has a problem with our continuing and finishing studying that bill, but I'm surprised to hear him suggest that somehow it's not important to him.

What I've made clear to him is that, beyond the study of that bill, in industry committee—and we're about to go over there right after this meeting—we'll be supporting cancelling what's on the agenda or moving forward what's on the agenda so that we can clear our schedule for the following meetings of the industry committee. But again, to be clear, right now we're studying a bill on Nortel pensioners, a private member's bill from the NDP, and we think it's important that we finish that study.

Second, in regard to all the commentary around timelines here, you can say what you want about the parliamentary schedule and the way things happen in the House of Commons. There are all sorts of reasons that things take a little while to work their way through the House of Commons. On some bills, certain parties insist on putting up virtually every member of their party to speak on the bill, and that eats up a significant amount of time. From time to time, a party will move a concurrence motion and eat up three hours in a day. There are all sorts of reasons why things take time to go through the parliamentary schedule. Of course, there is negotiation among the House leaders of the parties to determine what actually goes through.

But let's be clear. We did a consultation in 2009 over the course of the summer, intensive consultation in which we heard from stakeholders on this. The bill was introduced several months ago, obviously, and that has allowed time to have various stakeholders study the bill themselves to come to positions, so that when we get to this point, at committee, we can do a proper study of the legislation. There are more stakeholders on this piece of legislation than any piece of legislation I've seen, and I think we're all aware of that.

So that's where we are in terms of timeframe. I think most Canadians who looked at that timeframe would think it's reasonable. Now it's time to get to work studying the legislation. What we're saying at this point is that four hours a week is not enough. It's plain and simple: four hours a week is not enough. I'll be careful in the way I word this, because there's some sensitivity on the other side, but it's quite clear that the opposition parties had discussions prior to this meeting, because they all came in with the exact same position—four hours a week.

We were surprised by that. Up until 15 minutes before this meeting, I hadn't had a conversation with somebody from the other side who had suggested that to me. We had conversations, but no one had suggested four hours a week until fifteen minutes before the meeting. Yes, it did surprise us, thus the reaction on this side. It sounds like it's a done deal. It was decided long ago by the other three parties. There's apparently not much that we can do about that, and we're going to move forward on it, but I hope that as we move forward we'll have the opportunity to take a look at our schedules within the industry committee and the heritage committee to try to clear up some time.

Certainly it sounds from what Mr. McTeague is saying as though, once we finish hearing from witnesses—hearing from the people affected by the Nortel situation—and get through the study of Bill C-501, there will be some cooperation among parties to clear the schedule. If this committee wishes to take up that time, that would give us four more hours a week, moving forward after this week. Perhaps we can see the same thing happen in the heritage committee.

My hope is that moving forward we'll see some increased level of cooperation among the parties to place a higher priority on this particular issue. Again, I implore the members of the committee, whatever your position is or whatever it is you might want to change about this legislation, hopefully there's a commitment to try to ensure that the legislation passes before we wind up coming to election, whatever it might be that precipitates that election at some point in a minority Parliament. Otherwise, we're just going to be doing this over and over again, and that's not in the interests of any of the stakeholders.

[Joe Hanlon]

I believe Bill C-501 is going in the right direction in assisting workers. I speak passionately on it, because as a rep and the president of our local I've unfortunately had to deal with the thousands of members who are facing the problems I've spoken about here today.

Can we do anything politically as a federal government to ensure that they have livelihoods, that their pensions survive, and that they get the severance and termination pay they deserve? That's all in our means to do, and we should do it.

Bill C-501 is a good start, but is there something else we can do? We should be doing that today, because the financial institutions aren't going to loan money today based on the changes of Bill C-501. I say that because it's the economy: in the forest industry, lumber prices are down in the toilet--